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TMI BlogGUIDANCE NOTE ON MAINTENANCE OF COST ACCOUNTING RECORDS FOR CONSTRUCTION INDUSTRY INCLUDING REAL ESTATE AND PROPERTY DEVELOPMENT ACTIVITYX X X X Extracts X X X X X X X X Extracts X X X X ..... isting on any stock exchange, whether in India or outside India. Provided that these rules shall not apply to a company which is a body corporate governed by any special Act; Provided further that these rules shall not apply to the activities or products covered in any of the following rules,- (a) Cost Accounting Records (Bulk Drugs) Rules, 1974 (b) Cost Accounting Records (Formulations) Rules, 1988 (c) Cost Accounting Records (Fertilizers) Rules, 1993 (d) Cost Accounting Records (Sugar) Rules, 1997 (e) Cost Accounting Records (Industrial Alcohol) Rules, 1997 (f) Cost Accounting Records (Electricity Industry) Rules, 2001 (g) Cost Accounting Records (Petroleum Industry) Rules, 2002 (h) Cost Accounting Records (Telecommunications) Rules, 2002." A copy of the above notification is attached as annexure I. In view of the above as well as the clarification issued on 25th May, 2012 (annexed as annexure II) by the Ministry of Corporate Affairs, companies engaged in: (a) Construction (incl. development or real estate) industry who meets with the threshold limits laid down in Rule 3 of the Companies (Cost Accounting Records) Rules, 2011 shall be required to maintain cost ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contract. • Contracts also normally stipulate work/quality certification by a client nominated third party consultant. • Contracts also lay down performance guarantee conditions, warranty/defect liability period, liquidated damages for schedule delay, price variation clause if any, client's obligations during construction period, method to be followed for any change in scope of work, claim management, force-majeure clause, arbitration etc. • The duration of a project may vary from project to project for different industries. Normally the projects are of long duration (more than 12 months) and revenue is recognised generally based on Accounting Standard (AS-7) notified by Government of India, Ministry of Corporate Affairs. 2.2 The categories under which the Constructions Industry may be operating are: • Construction involving civil and heavy engineering • Real estate and Property development • Construction projects involving specialty trades Few examples of above categories are as under: Construction involving civil and heavy engineering • Industrial and mining infrastructure • Highways, roads, ports, railways, airpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncing to the buildings and other fixtures such as plumbing, heating and lighting appliances. Real estate development is the act of purchasing land, real estate, making improvements to the land and/or existing buildings on it and/or new construction - either by themselves or by contractors and selling the property after development. Developers purchase the land/real estate from Government/existing owner. Some commonly used models of Real estate development are: • Green field development (Traditional model) • Redevelopment model Examples of Real estate development projects are: • Housing, Land and Township Infrastructure Development • Development of commercial real estate • Development of Corporate IT parks 2.3.3 EPC Contracting Model The Developer of a project (either Govt. or Private player under PPP model) delegates a portion of the contract to an EPC (Engineering, Procurement and Construction, including installation, commissioning etc. wherever applicable) Contractor. These contracts are finalised normally through a technical and commercial bidding process and the projects are executed as per client's requirements at the project site. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h analysis of individual cost components and relating it to the activity for which the same is incurred would help the company in taking proper management decisions. 3.3 It should be kept in mind that in a manufacturing organisation, the operations include certain repetitive processes resulting in a particular "product" that can be measured in finite manner. In a construction activity, each project or operation can be different and distinct and there is a need to define the "cost object" in relation to which the costs are required to be accumulated and reported. 3.4 Reference is also drawn to the product group classification notified by the Ministry of Corporate Affairs where the construction industry has been classified under the following service groups: (a) Construction of residential buildings (b) Construction of non-residential buildings (c) Construction of highways, road, bridges etc. (d) Construction of industrial and non industrial plants, structures and facilities (e) Laying of pipelines, communication and power lines (f) Other construction activities not elsewhere specified (g) Real estate development activities (h) Architectural and engineer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.7 These rules will not apply to construction activity which is not meant for sale or for commercial use. For example, a company not engaged in construction business, but constructing staff quarters for its employees or erecting manufacturing plant, will not be covered under the maintenance of CARR relating to Construction activity. 3.8 Nature of cost accounting records for construction activity Companies are to maintain books of accounts as per section 209 of the Companies Act, 1956, including cost accounting records on going concern basis. Therefore even if a company has not commenced any project or activity, still records are required to be maintained. In case of companies engaged in manufacturing or production of items for self consumption then: (a) Valuation of product which are covered under CETA, shall be in accordance with Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 read with CAS-4 (Cost Accounting Standard on Cost of Production for Captive Consumption), wherein valuation is to be based on cost of production plus 10% for determining the assessable value under the above rules. (b) For determining the value of inter-unit transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of a Power Plant. The company has received the contract of road and bridge construction as 2 separate projects (say Projects D1 and D2). For maintenance of cost accounting records, the company would be required to maintain specified records in respect of Projects A, B, C, D1, D2 and E as its distinct and individual cost objects. 3.9.2 Detailed cost records are also to be maintained for each sub cost centre/sub project. These records are also used for internal reporting (MIS) , cost control and decision making process as these are useful for determining the cost of project/activity separately. 3.10 Methodology 3.10.1 Project Costing Methodology Once a project is awarded based on Technical/Commercial/Price evaluation, a distinct project number is allotted for each project. As per the requirement of management, costs can be collected for various activities and the same can be in the form of Work Breakdown Structure (WBS) or Sub-project numbers etc. . All costs incurred for the project should be captured against its WBS number/cost object/Sub-project number. . All common functions like Quality Control, HR, Finance & Accounts, Legal, Secretarial etc. is to be identified by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n projects, the administrative overheads and corporate expenses are not allocated to individual project accounts. However, for cost accounting records and to arrive at the true project costs, such overheads should be apportioned to individual projects on a suitable basis. 3.15 Interest and Financing charges, not directly related or identified with a particular project should be apportioned to the projects on a suitable basis. CHAPTER 4 Generally Accepted Cost Accounting Principles and Cost Accounting Standards 4.1 Rules 4(3) of the CARR 2011 provides that the cost records shall be maintained in accordance with the generally accepted cost accounting principles and cost accounting standards issued by the Institute; to the extent these are found to be relevant and applicable. The variations, if any, shall be clearly indicated and explained. 4.2 The Institute has notified the Generally Accepted Cost Accounting Principles (GACAP) in November 2011. GACAP is compilation of Cost Accounting Principles currently being followed in India. It has also incorporated the principles contained in the Cost Accounting Standards (CAS) issued by the Cost Accounting Standards Board (CASB) of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 5.3 While formulating the Cost Accounting Standards, the CASB takes into consideration the applicable laws, usage and business environment prevailing in India. CASB also gives due consideration to the Cost Accounting Standards, principles and practices being followed by the other countries in the world. If due to subsequent changes in the law, a particular standard or any part thereof becomes inconsistent with such a law, the provisions of the said law shall prevail. 5.4 Applicability of CAS: 14 Cost Accounting Standards have been issued and their applicability is discussed as under: CAS No Title Applicability CAS 1 Classification of Cost Applicable. To be applied for proper classification and assessment of cost of a cost object and for preparation of Cost Statements on consistent and uniform basis. CAS 2 Capacity Determination Not Applicable for construction activity. CAS 3 Overheads Equally apply to Construction activities. Overhead expenses are to classified as Site/Works/Construction Overheads, Administrative Overheads. Selling Overheads or any other classification as may be applicable. For control purposes, the Overheads are to be classified as Fixed, Variabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such items) • Liquidated damages (adjusted against contract value in financial accounts), • Encashment of BG charges and incidental arbitration charges, • Pre-operative expenses, • Provisions, Contingent liabilities and contingent assets • Under absorption of overheads due to idle capacity • Foreseeable loss (Financial provision for projected loss) • Cost incurred in subsequent financial years for closed jobs • Impairment of Fixed Assets • Bad debts written off • Donation • Forex variations • Inventory write-off • Profit/Loss on sale of business • Provisions No Longer Required written back • Unclaimed credit balances • Assets scrapped/obsolete • Penal recoveries from Sub-Contractors CHAPTER 7 Preliminary Steps for the CARR Compliance The following steps may be taken by the companies engaged in construction activity w.r.t. compliance of the Companies (Cost Accounting Record) Rules 2011: A. Steps required for maintenance of Cost Records: (i) Prepare check list for compliance with the provisions of CAS and GACAP in regard to the following elements of cost: & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct Group Classification issued by Ministry of Corporate Affairs relating to product produced/manufactured/services rendered and trading activities Column 2 Indicate the nomenclature of each product code as indicated in column 1. Column 3 Unit of measurement is to be indicated in this column for produced/manufactured/fabricated products. Column 4 Annual production quantity is to be indicated for produced/manufactured/fabricated products. The total production quantity should match with the excise records. For service and trading activities, quantity need not be indicated, if not relevant. Column 5 The 'Net Sales' column has two sub columns viz. 'quantity' and 'value (in Rupees)'. Quantitative and sale value details will be nil, if produced/manufactured/fabricated products are captively consumed. For service/trading activities net sales value (net of taxes and duties) are to be indicated. Total Income is to be indicated as per financial accounts. Item 3: Reconciliation statement Column 2 It is a reconciliation of net margin (Profit and loss as per cost accounts).Details to be furnished in column 2:A: Net margin (profit or loss) produced or manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of uploading the filled Form 23CR-XBRL is same as the process of filing of any other e-form. The Compliance Report filed by the Company is not public document and cannot be viewed in public domain by anyone. The following steps are to be followed in sequence in order to file the Compliance Report in XBRL mode: 1. Mapping the individual cost elements of the company to the elements of the costing taxonomy. 2. Populating the relevant data in the software/filing tool. 3. Creating instance document. 4. Validating the Instance Document with the Validation Tool of MCA. 5. Use available tool to convert the Instance document to a human readable format and check correctness of data. 6. Attaching the Instance Document to the e-Form and filing on MCA Portal. The Institute is in the process of issuing a guidance note on filing of Cost Audit Report and Compliance report in XBRL mode, which may be referred to. ANNEXURE I [TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY PART-II, SECTION-3, SUB- SECTION (i)] MINISTRY OF CORPORATE AFFAIRS Notification New Delhi, dated the 3rd June, 2011 G.S.R. 429(E) - In exercise of the powers conferred by clause (b) of sub-section (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report duly authenticated and signed by a cost accountant in the prescribed form of compliance report; (c) "Cost Accountant" for the purpose of these rules means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959) and who is either a permanent employee of the company or holds a valid certificate of practice under sub-section (1) of section 6 and who is deemed to be in practice under sub-section (2) of section 2 of that Act and includes a firm of cost accountants; (d) "Cost Accounting Standards" means the standards of cost accounting, issued by the Institute; (e) "Cost Records" means books of account relating to utilisation of materials, labour and other items of cost as applicable to the production, processing, manufacturing or mining activities of the company; (f) "Form-A" means the form prescribed in these rules for filing compliance report and other documents with the Central Government in the electronic mode; (g) "Form-B" means the form of the compliance report and includes Annexure to the compliance report; (h) "Generally Accepted Cost A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or (xii) obtaining, compiling, recording, maintaining, transmitting, holding or using the information or data or knowledge; or (xiii) executing instructions in memory to perform some transformation and/or computation on the data in the computer's memory. (m) "Product" means any tangible or intangible good, material, substance, article, idea, know-how, method, information, object, service, etc. that is the result of human, mechanical, industrial, chemical, or natural act, process, procedure, function, operation, technique, or treatment and is intended for use, consumption, sale, transport, store, delivery or disposal. (n) "Product Group" in relation to tangible products means a group of homogenous and alike products, produced from same raw materials and by using similar or same production process, having similar physical or chemical characteristics and common unit of measurement, and having same or similar usage or application; and in relation to intangible products means a group of homogenous and alike products or services, produced by using similar or same process or inputs, having similar characteristics and common unit of measurement, and having same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Records (Telecommunications) Rules, 2002. 4. Maintenance of records- (1) Every company to which these rules apply, including all units and branches thereof shall, in respect of each of its financial year commencing on or after the 1st day of April, 2011, keep cost records. (2) The cost records referred to in sub-rule (1) shall be kept on regular basis in such manner so as to make it possible to calculate per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly/quarterly/half-yearly/annual basis. (3) The cost records shall be maintained in accordance with the generally accepted cost accounting principles and cost accounting standards issued by the Institute; to the extent these are found to be relevant and applicable. The variations, if any, shall be clearly indicated and explained. (4) The cost records shall be maintained in such manner so as to enable the company to exercise, as far as possible, control over the various operations and costs with a view to achieve optimum economies in utilization of resources. These records shall also provide necessary data which is required to be fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be punishable as provided under sub-section (2) of section 642 read with sub-sections (5) and (7) of section 209 of Companies Act, 1956 (1 of 1956). 9. Savings - The supersession of the Cost Accounting Records Rules, shall not in any way affect- (a) any right, obligation or liabilities acquired, accrued or incurred thereunder; (b) any penalty, forfeiture or punishment incurred in respect of any contravention committed thereunder; and (c) any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid, and; any such investigation, legal proceeding or remedy may be instituted, continued or enforced and any such penalty, forfeiture or punishment may be imposed as if those rules had not been superseded. [F. No. 52/10/CAB-2010] B.B. GOYAL ADVISER (COST) FORM-A Form for filing Compliance Report and other documents with the Central Government [Pursuant to section 209(1)(d), 600(3)(b) of the Companies Act, 1956 and rule 2 of the Companies (Cost Accounting Records) Rules, 2011] PART I - GENERAL INFORMATION Note: All fields marked in * are to be mandatorily filled. 1 (a) *Corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n *Director identification number of the director or Managing Director; or Income-tax PAN of the manager or of authorized representative; or Membership number, if applicable or income-tax PAN of the secretary (secretary of a company who is not a member of ICSI may quote his/her income-tax PAN) Director of the company Digital Signatures Director identification number of the director Modify Check Form Pre-scrutiny Submit This e-form has been taken on file maintained by the Central Government through electronic mode and on the basis of statement of correctness given by the filing company FORM-B FORM OF COMPLIANCE REPORT [See rule 2, and rule 5] I/We ………….. being in permanent employment of the company/in practice, and having been appointed as cost accountant under Rule 5 of the Companies (Cost Accounting Records) Rules, 2011 of ………..… (mention name of the company) having its registered office at …………………………. (mention registered office address of the company) (hereinafter referred to as the company), have examined the books of account prescribed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2. 3. etc. B Services Groups 1. 2. 3. etc. C Trading Activities (Product Group-wise) 1. 2. 3. etc. D Other Income Total Income as per Financial Accounts 3. RECONCILIATION STATEMENT: Net Margin (Profit or Loss) as per Cost Accounts (In Rupees) A. From Produced or Manufactured Product Groups B. From Services Groups C. From Trading Activities Total as per Cost Accounts Add: Incomes not considered in Cost Accounts (if any) Less: Expenses not considered in Cost Accounts (if any) Add/Less: Difference in Stock Valuation Profit or (Loss) as per Financial Accounts NOTES: (i) For produced or manufactured product groups, use the nomenclature as used in the Central Excise Act or Rules, as applicable. (ii) For services groups, use the nomenclature as used in the Finance Act or Central Service Tax Rules, as applicable. SIGNATURE NAME COST ACCOUNTANT (S) MEMBERSHIP NUMBER (S) SEAL DATE Annexure II F. No. 52/1/CAB-2012 Government of India Ministry of Corporate Affairs Cost Audit Branch ***** B-1 Wing, 2nd Floor, Paryavaran Bhavan, CGO Complex, New Delhi-110003 Dated the 25th May, 2012 To, The Secretary General, Construction Federation of India, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esidential, commercial or industrial estates i.e. development of township, residential units, commercial complex, office blocks, industrial parks [including SEZ], etc. or construction of highways, rails, roads, bridges, industrial & non-industrial structures, or other infrastructure facilities etc or construction activities undertaken under BOT/BOOT mode, or the projects undertaken as EPC contractor or the projects undertaken abroad by a company incorporated in India. (b) As per MCA's General Circular No. 67/2011 dated 30th November, 2011, companies engaged in construction business as contractors or sub-contractors wherein they are paid only the conversion charges are exempted from the applicability of Companies (Cost Accounting Records) Rules, 2011. (c) Companies (Cost Accounting Records) Rules, 2011 do not apply to such Joint Ventures that are non-corporate entities [i.e. not companies registered under the Companies Act] or to unlisted companies that are below the specified threshold limits or to a body corporate governed by any special Act. (d) As on date, no cost audit is applicable on the companies engaged in the construction and/or development (real estate) business. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the production, processing, manufacturing or mining activities till such time they commences their commercial operations. V. Ancillary products/activities of companies incidental to their main operations (i.e. Products/activities that do not constitute their main line of business) and wherein the total turnover from the sale of each ancillary products/activities do not exceed 2% of the total turnover of the company or ₹ 20 crores, whichever is lower, however, required details of all such ancillary products/activities may be maintained under a miscellaneous group and disclosed appropriately. (b) That the Cost Audit Orders (no.52/26/CAB-2010 dated 2nd May, 2011 and 30th June, 2011) shall not apply to the following cases: I. Generation of electricity for captive consumption. For this purpose, the term "Captive Generating Plant" shall have the same meaning as assigned in Rule3 of the Electricity Rules, 2005. II. Own manufactured products that are consumed exclusively the company for the sole purpose of production, processing, manufacturing, or mining of its other products or activities that are subject to cost audit. III. Hundred percent Export Oriented Units. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requested to circulate this General Circular for information of all concerned. Yours faithfully, (B.B. Goyal) Advisor (Cost) Copy to: 1. E-Governance Cell, Ministry of Corporate Affairs, Shastri Bhavan, New Delhi with a request to upload this circular on the MCA's website. 2. All Regional Directors/ Registrars of Companies. 3. PS to CAM/ PS to MOS 4. PS to Secretary/ Addl. Secretary 5. PS to Joint Secretary(a)/ Joint Secretary(R)/ Joint Secretary (M) 6. PS to DII (DR)/DII (policy) 7. PS to Economic Adviser. Annexure IV ANNEXURE TO THE COMPLIANCE REPORT [See rule 2 and rule 5] 1. GENERAL: (a) Name of the company: M/s XYZ Company Limited (b) Registered office address: 35, ABC, New Delhi (c) Financial year to which the Compliance Report relates: 2011-12 2. QUANTITATIVE INFORMATION: S. no. Name of the Product or Service Group Unit Annual Production (Qty.) Net Sales (Qty.) (Value in Rupees in Lakhs) A Produced or Manufactured Product Groups 1. Cement (Product Group 1102) Tonnes 5000 4500 48 2. 3. etc. B Services Groups 1. Construction of Residential Building (5001) Number 100 98 30000 2. Real Estate Development Activities (5051) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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